Do Founders Control Start-Up Firms that Go Public?

Date posted :

Last revised :

Keywords

Startups •

Founders •

venture capital •

VC •

IPOs •

stock markets •

innovation •

Entrepreneurs •

venture capitalists •

Corporate governance •

CEO •

shareholders •

NASDAQ

Black & Gilson (1998) argued that an IPO-welcoming stock market stimulates venture deals by enabling VCs to give founders a valuable “call option on control”. We study 18,000 startups to investigate the value of this option. Among firms that IPO, 60% of founders are no longer CEO. With little voting power, only half of the others survive three years as CEO.

At initial VC financing, the probability of getting real control of a public firm for three years is 0.4%. Our results shed light on control evolution in startups, and cast doubt on the plausibility of the call-option theory linking stock and VC markets.

Related Working Paper

Featured Working Papers

What are the implications of artificial intelligence (AI) for corporate law? In this essay, we consider the trajectory of AI’s evolution, analyze the effects of its application on business practice, and investigate the impact of these...Read more

US corporate law and, in particular, Delaware law, which leaves ample room to freedom of contract, has been one of the reasons for the successful creation and financing of startups in Silicon Valley. We analyze the Italian attempt to modernize...Read more

In order to favor shareholder investment over a longer time horizon, Italy introduced loyalty shares in late 2014, which allow double voting rights after a two-year continuous holding period. Italian listed firms which adopted loyalty shares (...Read more

Companies with a dual-class structure have increasingly been involved in high-profile battles over the reallocation of control rights. Google, for instance, sought to entrench its founders’ control over the corporation by recapitalizing from a...Read more